Banks are central to the nation’s financial system because, by receiving deposits and distributing loans, they circulate money. This makes stable and efficient banks essential to the economy. Bank auditors, therefore, evaluate financial information for accuracy and perform procedures that determine if management controls are effective. The public can rely on the banking system because of these audit activities.

Key Areas

Auditors define your bank’s key areas depending on factors such as the services it offers, systems it runs and the risk of fraud or misstatement these systems pose. They examine all the earning streams, including interest income, and the recording mechanisms. They also audit all expense streams, including interest, human resources and regulatory expenses and their recording mechanisms. Items that have an element of human judgment, such as provision for bad debts or asset capitalization, also attract the auditors’ attention. Other significant areas include key assets and liabilities, such as government grants, tax assets or loans.

Test of Details

Test of details is a substantive audit procedure that auditors carry out when they think that the risk of misstatement at the assertion level is substantial. While auditing your bank, auditors usually assume loans are risky. This is because the more loans the bank issues, the more interest it earns. Therefore, as a test of detail, auditors send out confirmation letters to customers who borrowed from your bank. These borrowers respond to the letters, confirming their balances and interest due. Recalculations and physical inspection are among the other tests of details that auditors use. These tests are evidence that the information is legitimate.

Substantive Analytics

While auditing your bank’s financial statements, auditors apply a second type of substantive procedure, the substantive analytics. While performing this analysis they try to find existing plausible relationships among financial data. For example, if your bank’s lending is increasing, auditors expect to find a corresponding increase in interest income. If they don’t find this increase in interest, they look for and try to identify, calculate and corroborate reasonable factors contributing to this situation.

Test of Controls

Usually, when risk of material misstatement isn’t high, auditors rely on a test of controls and substantive analytics for their opinion. Tests of controls are procedures that auditors perform to determine how effectively management or system controls function. Their goal is to find significant control weaknesses if they exist. For example, auditors check whether your bank’s system correctly calculates interest and principal. They also check to see if appropriate bank employees with applicable authorization approve them.